Volkswagen AG recalled a record number of vehicles in China to replace defective gearboxes that may result in the loss of acceleration, in a move that may cost Europe's largest carmaker more than $600 million.

The recall of 384,181 vehicles, conducted by Volkswagen and its joint ventures, include the Golf, Magotan, Sagitar and Audi A3, China's quality inspector said on its website. While Volkswagen declined to comment on the financial toll, research firm LMC Automotive estimated the replacements will cost between 3,000 yuan ($483) to 10,000 yuan per vehicle.

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The move is a blow for Volkswagen, which counts China as its biggest market, as the company sets out to become the world's largest automaker by 2018. The recall comes less than a week after state broadcaster China Central Television featured Volkswagen customers in China complaining about abnormal vibrations, loss of power and sudden acceleration in cars equipped with the company's proprietary gearbox technology.

"It's always reputationally damaging to have to deal with an issue that plays out in the public's eyes," said Bill Russo, president of auto consultancy Synergistics Ltd. "Will they take a hit? Of course. The issue is how can they recover from that and how quickly can they recover."

21 Models

The company is recalling vehicles with the seven-speed variety of its direct-shift gearboxes, bearing the cost for replacing defective equipment and upgrading the software, it said in an e-mail statement. LMC estimates Volkswagen sold about 680,000 vehicles equipped with the potentially faulty DSG gearboxes.

"There have been no injuries or accidents reported due to the DSG gearbox problem, as far as we know," Volkswagen China spokesman Christoph Ludewig said.

The recall covers 21 types of vehicles including versions of the Scirocco, Bora, Touran, Octavia, Passat vehicles produced as far back as 2008 and as recently as this month, according to the state inspector's statement.

For Volkswagen, which sold 4 of China's top 10 selling cars last year, complaints about its gearbox system in China aren't new. In May, the Wolfsburg, Germany-based carmaker agreed to extend the warranty for the transmission technology to 10 years, compared with the standard warranty of two years, to address consumer concerns.

China's quality inspector said it began investigating complaints related to faulty Volkswagen gearboxes in March 2012. Two months later, the company extended its warranty for the transmission system after several rounds of talks with the regulator, according to the statement.

Safety Threat

A malfunction of electronics in the gearbox or inadequate pressure may result in the loss of power, presenting a safety threat, according to the regulator. Last May, Volkswagen spokesman Harthmuth Hoffmann said that the reported problems -- noise, vibrations and failure to start in hot and humid weather -- were "absolutely not a safety issue."

Volkswagen said today that although an electronic malfunction or a lack of oil pressure may result in a power interruption, steering and braking functions wouldn't be affected. That means that even if the car loses power on the road, the driver would be able to safely stop the car, it said.

China's quality regulator said it interviewed more than 3,000 consumers, received more than 10,000 reports of faultiness, conducted 12 spot checks and held 7 hearings with automotive experts before concluding that the Volkswagen gearboxes were defective and posed a safety concern.

New Laws

The move also comes after China introduced recall laws this year giving the watchdog broader powers to order investigations and impose fines on companies that fail to call back faulty products in a timely manner. The nation's legislature approved plans last week to expand the authority of the food and drug regulator amid growing public discontent over quality and safety.

Volkswagen and its ventures sold 2.81 million vehicles in China last year, second only to General Motors Co. among foreign automakers. The German company and its Chinese partners generated operating profit of 3.7 billion euros ($4.8 billion) last year, up by 1.1 billion euros from the previous year.

Other German automakers have also faced scrutiny in the past week from CCTV, which said it found asphalt in China-made models of cars made by Volkswagen's Audi, Bayerische Motoren Werke AG's BMW and Daimler AG's Mercedes-Benz.

Pungent Smell

Samples taken from vehicles showed traces of asphalt, a road-paving material also used for reducing vibrations, CCTV reported. Owners reported a pungent smell in their cars and physical symptoms such as dizziness and swollen fingers, according to the CCTV report.

Representatives from all three companies said they have started investigations. Audi China spokesman Martin Kuehl said Audi has the same "strict standards" for all of its parts globally, and that the locally produced A4L and Q5 models had passed vehicle air quality tests conducted by the Chinese authorities.

Daimler spokesman Senol Bayrak said all its vehicles manufactured in China use only imported NVH damping materials that comply with existing regulations.

The three German luxury brands command about 74 percent of China's luxury segment, according to estimates from researcher IHS Global Insight.

While the report might not significantly affect total luxury car sales, it could push Chinese consumers toward choosing imported models of luxury marques over models manufactured in China, according to John Zeng, Shanghai-based managing director at LMC Automotive. Tata Motors Ltd.'s Jaguar Land Rover and Zhejiang Geely Holding Group Co.'s Volvo Cars may benefit since they focus on imports, he said.

"People will choose the import models, because they realize that on quality levels, the import models are very different from locally-made ones," Zeng said.

--Alexandra Ho and Tian Ying. Editors: Young-Sam Cho, Chua Kong Ho

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113bloomberg.net; Tian Ying in Beijing at ytianbloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2bloomberg.net

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